Investors have short memories, and after having deserted Chinaco after the Sinaforest et al debacles, money is piling back in. The problem though can be that investigators can be at risk!!

Private investigators

Another turn of the screw

Due diligence just got harder

“I DO not understand China’s laws.” So declared Peter Humphrey, a British corporate investigator working in China, to a court in Shanghai on August 8th when confronted with evidence of alleged wrongdoing. In the end, he and his wife, an American citizen who is also his business partner, were found guilty of violating laws protecting personal privacy. Mr Humphrey was jailed for two-and-a-half years; his wife, Yu Yingzeng, for two. After completing his term, Mr Humphrey will be booted out of the country.

The verdict did not come as a surprise. Even so it sent chills down the spines of investigators carrying out due diligence on prospective Chinese business partners. Life was never easy for such folk, given that information on such basic things as credit history and asset ownership is hard to verify in China. Now it will get harder still.

Since Mr Humphrey had spent years as a reporter and private investigator, his claim that he did not understand China’s privacy laws may seem a stretch. In fairness to him, though, there have always been grey areas. For example, it was not clearly illegal in the past to obtain personal data that had been posted online or that was included in documents pertaining to property transactions.

The silver lining in this ruling, says Violet Ho of Kroll Associates, an investigative firm whose China practice Mr Humphrey helped to start, is that what was once ambiguous is now crystal clear. However innocent the means by which they obtain them (a defence offered at his trial was that some of the data in question had come from third parties), it is now clearly off limits for investigators to get hold of personal-identity numbers, phone records, bank statements, travel logs and the like.

Alas, that silver lining comes with dark clouds for investigators and their clients. The court ruling makes it clear that China now intends to enforce its laws on data privacy, which are closer to the EU’s tough laws than to America’s business-friendly approach. Investigators will now have to spend more time conducting personal interviews and reference checks. Kent Kedl of Control Risks, a consultancy, adds that Chinese firms are now more complex and geographically spread out than before, making the job all that much harder.

Some applaud the enforcement of privacy laws as part and parcel of President Xi Jinping’s noisy effort to enforce the rule of law and root out corruption. But there is an incongruity here. As Nathan Bush of O’Melveny & Myers, an American law firm, observes, restricting access to personal data makes it easier for those with bad intentions to get away with fraud.